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USDT, also known as Tether USD, is the largest and most used stablecoin in the world. USDT’s value is pegged 1:1 to the US dollar, meaning that $1 is equivalent to 1 USDT.
USDT has become the foundation of digital currencies. This currency powers transactions, trading, fund transfers, and daily spending.
What is the difference between stablecoin and other cryptocurrencies? This article will discuss stablecoins, especially USDT, in full detail.
Stablecoin is a type of cryptocurrency designed to have a stable value. Typically, its value is pegged to more stable assets, such as fiat currencies or commodities like gold.
Most stablecoins are backed by reserve assets, such as the US dollar or its equivalent. This means that every time a stablecoin is created, there are assets of equivalent value stored as reserves. The goal is to maintain price stability.
Stablecoin is a type of cryptocurrency, while Bitcoin is the largest cryptocurrency in existence. What is the difference between them?
a. Goal
Bitcoin is created with the goal of being an alternative of fiat currencies. Its fluctuating value makes Bitcoin perfect for investments and a hedge against inflation. On the other hand, stablecoins are created as a solution for Bitcoin’s volatility.
b. Management
Bitcoin is decentralized, meaning that it operates without being controlled by a single entity. Meanwhile, most top stablecoins are centralized, as they are issued and managed by an entity. For example, USDT was issued by Tether Limited.
c. Interoperability
Interoperability means the ability of multiple blockchains to communicate. Bitcoin runs in its own blockchain network, while stablecoins can run on multiple different blockchains.
Stablecoins are categorized into 4 types depending on the reserve asset that stabilizes its value.
This type of stablecoin is pegged to fiat currencies such as the US dollar. These reserve assets are held by independent custodians that are audited regularly.
Some of the most well-known examples of this type of stablecoin are Tether (USDT) and USDC, both of which use the US dollar as their reserve asset.
This stablecoin is backed by commodities such as gold and oil, held by a third-party custodian or an investment entity.
One of the most well-known examples of this type of stablecoin is Tether Gold (XAUt), which is backed by gold.
This type of stablecoin uses other crypto assets as collateral. An example is MakerDAO, which is backed by the US dollar, but also supported by Ethereum and other cryptocurrencies.
Given the volatility of crypto assets used as collateral, this type of stablecoin is generally overcollateralized. This means that the price benchmark is not 1:1. The value of the cryptocurrency used as collateral usually exceeds the value of the stablecoin itself.
Algorithmic stablecoins may or may not have reserve assets. To maintain the stability of this type of stablecoin, an algorithm is used to execute a predetermined formula.
At first glance, this is no different from a central bank that does not have reserve assets to set the value of a currency. The difference is that central banks set monetary conditions based on commonly understood parameters.
In addition, the central bank's reputation and authority as the official tender holder make the conditions it issues more credible.
Meanwhile, algorithmic stablecoins do not possess this advantage if their value falls during a crisis. An example is TerraUSD (UST), an algorithmic stablecoin whose value plummeted more than 60% in 2022. As a result, the coin's peg to the US dollar collapsed.
Given the main characteristic of stablecoins, which is that their value is pegged to a reserve asset, this cryptocurrency has several advantages and disadvantages. Consider the following before investing in stablecoins.
Tether (USDT) and USDC are two popular stablecoins backed by the US dollar. Which one is more suitable as an investment asset? Consider the following comparison before making a decision.
USDT or Tether is issued by Tether Limited as the first stablecoin on the market. This stablecoin also holds the largest market capitalization. Its reserve assets are a mix of US dollars, bonds, and other assets.
USDT has several advantages, including:
USDT has the following disadvantages:
USDC or USD Coin is issued by Circle in collaboration with Coinbase through the Centre Consortium. This asset is 100% backed by US cash and US government bonds. Its market capitalization is the second largest after USDT.
The following are the advantages of the USDC stablecoin:
Meanwhile, USDC’s disadvantages include:
Between USDT and USDC, which one is better? There is no absolute winner, because both have their own pros and cons. Choose the stablecoin that suits your needs and investment goals.
In the world of crypto asset trading, stablecoins offer flexibility and control, granting a sense of security for traders. Here are some of the most important functions of stablecoins in trading.
Hedging is a technique to protect crypto assets from price fluctuations when the market is unstable. With hedging, traders can minimize risk and cover losses.
When the market is unstable, many traders convert their volatile tokens into stablecoins. This way, they can lock in profits and reduce their assets' exposure to an unstable market without having to liquidate them.
Once the market recovers, traders can convert stablecoins back to their preferred assets.
Dollar-Cost Averaging is a strategy to reduce investment risk during market downturns. This is done by spreading purchases over a certain time interval.
Stablecoins are suitable assets for this strategy. Traders can store their crypto assets on the blockchain without having to liquidate them into fiat currency.
When a trader is transitioning between one trading activity and another, they can use stablecoins as a place to “park” their assets.
The risks associated with stablecoins are easier to manage, and they can be easily converted into other assets when the trader is ready to trade again.
A stablecoin that loses or deviates from its reserve asset peg is called de-pegging. If this happens, the stablecoin may not return to its original value. But don't worry, popular stablecoins such as USDT and USDC are unlikely to experience de-pegging. These assets generally only experience minor fluctuations.
Yes, stablecoins can be used in staking programs or lending through crypto exchanges and DeFi platforms. You can earn an Annual Percentage Yield (APY) of 3-12%.
No. Stablecoins still possess several risks:
Popular stablecoins, such as USDT and USDC, have proven to be quite stable despite these risks. However, the risks associated with stablecoins are still higher than those of traditional deposits.
Yes, stablecoins are increasingly being used for international money transfers because they are much faster and cheaper. Senders and recipients also do not need to worry about volatility during the transfer process.
Stablecoins are a type of cryptocurrency whose price is pegged to other reserve assets. This makes stablecoins more stable in value than a typical cryptocurrency. Stablecoin is an attractive option for traders and investors to diversify their portfolios.
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